This is the 12th piece in Seeking Alpha's
Positioning for 2013
series. This year we have taken a slightly different approach,
asking experts on a range of different asset classes and investing
strategies to offer their vision for the coming year and beyond. As
always, the focus is on an overall approach to portfolio
Seeking Alpha's policy on anonymous authors
Seeking Alpha's Jonathan Liss recently spoke with Caiman Valores
to discuss Latin America's macro-economic outlook and evaluate
individual investing opportunities on the continent as we begin a
Jonathan Liss ((JL)):
How would you describe your investing style/philosophy?
Caiman Valores ((CV)):
I am a value investor focused on company fundamentals with a macro
overlay. For example when analyzing Latin American banks, I like to
thoroughly examine their asset quality, financial performance and
performance indicators, while also looking at growth opportunities
created by the economy in which they operate. This also applies to
FMCG companies like Arcos Dorados (
) and Telcos such as Telefonica (
), particularly as regional demographics heavily influence the
growth of market share for these companies.
As we approach 2013, are you bullish or bearish on Latin American
I am quite bullish on Latin American equities as a whole, despite
the problems in Brazil. Political risk will remain high,
particularly in Brazil, Argentina, Bolivia and Venezuela. Investors
will also need to understand the key economic and risk drivers,
with stock picking being key.
What are the major catalysts for Latin American equities in
Key catalysts include:
- A gradual improvement in the U.S. economy, with that country
being a major trade partner for the Andean countries like
- An economic recovery in China, which will drive further
demand for commodities from the region, particularly iron ore and
- An i mproving security situation in Colombia will mean
increased oil and gas exploration as well as additional foreign
investment, further fueling the remarkable Colombian growth
- Increased foreign investment, with the U.S. still having a
zero interest rate environment.
- Changing demographics in the region resulting from greater
global economic engagement and increased wealth. This will boost
the growth of the middle-class and further boost domestic
consumption particularly in Chile, Colombia and Brazil.
South American equities have remained decoupled from developed
world stocks for at least a decade. Even including more recent
underperformance, if you go back 10 years, the iShares S&P
Latin America 40 Index ETF (
) is up more than 2,800% vs. just a 55% gain for the S&P 500 (
). Going back 5 years to just before the financial crisis, the
S&P 500 is actually down slightly while ILF is up 300%. What
would it take for this sort of long-term outperformance relative to
developed equities to continue?
I believe Latin America's longer-term outperformance will continue
for at least the medium-term because so many countries within the
region are still decoupled from the mainstream global economy and
have significant growth potential. But as these economies grow they
become more closely coupled to the global economy as we are now
seeing with Brazil and Chile.
The outperformance is based more on these economies being
significantly less developed and then obtaining the necessary
resources, expertise and capital to develop. This sees a surge in
development as they become 'catch-up' economies that gradually
fades as they further develop. This growth then stalls when they
have reached the high-middle income point unless the country has
the ability to transition to a high income economy.
Therefore, it is essential for investors to understand the
correlation between economic development and investment returns,
although rapid economic growth is no guarantee of solid investment
Other drivers of this outperformance will continue to be demand
for the region's resources from a booming China and a gradual
growth in the middle-class in the region, which will boost
consumption. This we are already seeing with the recent surge in
the price of iron ore and subsequently Vale's (
) stock price.
As we begin 2013, what is your highest conviction pick?
That is a difficult question to answer because there are a number
of companies that I am bullish on, but if I had to choose one stock
it would be [[YPF]]. I believe that the company has been
significantly oversold on sentiment relating to the behavior of the
Argentine government and the growing political risk in the country.
I also believe that in the case of YPF this has been overplayed by
pundits and we are already seeing that with the company finding
investors for its shale oil and gas fields in the Vaca Muerta.
Which country or countries are you avoiding at present and why?
Which countries are you most bullish on as we head into the new
I am avoiding Venezuela and Bolivia. I had originally put Argentina
on that list, but while it is extremely risky I believe that there
is some value there and the political risk is not as heightened as
some pundits would have investors believe. I am also concerned by
the increasing political and economic risk in Brazil and again
while I am not avoiding the country, investors need to be aware of
The key reasons for this view are the high levels of political
risk in those countries combined with a recent history of erratic
and highly interventionist government policies. There has been a
significant resurgence in resource nationalism and populist
politics in those countries. I am also quite reluctant to invest in
Mexico, although I am not avoiding the country, with the ongoing
security issues, narco-trafficking conflict and high levels of
I believe that there are significant deep value opportunities
emerging in Argentina and growing opportunities in Brazil for those
investors with a high tolerance to risk.
I am most bullish on Colombia and Chile. It is my belief that
Colombia currently offers the biggest opportunity for investors,
particularly with the latest round of peace talks indicating the
security situation is further stabilizing. This will see further
oil and gas exploration and reduce t he likelihood of production
outages from oil pipeline attacks that were impacting the
production and revenue of Ecopetrol (EC) and the midsize and
The problem with Colombia as an investment is the lack of
U.S.-listed investment options, with only two companies with U.S.
listed ADRs, Ecopetrol and Bancolombia (CIB), as well as two
, Global X FTSE Colombia 20 ETF (GXG) and Market Vectors Colombia
Investing directly in Colombian stocks through the Colombian
Exchange is worrying at times, because of its generally low levels
of liquidity and ongoing issues around insider trading. This is why
I prefer U.S.-listed ADRs.
Chile is an interesting investment location. It is stable, has
solid regulations and low levels of corruption coupled with a
particularly strong banking and finance sector. I especially like
Banco Santander's (SAN) Chilean subsidiary Banco Santander Chile
(BSAC), which continues to perform strongly. I believe investing in
Chile is an important addition to any investor's portfolio,
providing geographic diversification along with access to probably
the most advanced economy in Latin America.
How important are demographic trends in reaching your overarching
investment thesis? How do demographic trends look in Latin America
from an investing perspective? Which industries/countries stand to
do best based on your reading of current demographic trends?
Demographic trends are very important in Latin America and I don't
believe that many pundits understand this. It is easy to see the
high levels of growth, particularly in the size of the middle-class
in the region and increasing consumption. I believe that this will
continue to drive economic growth.
There are significant structural demographic and economic issues
within the region's economies, the key ones being that these
countries are export-based economies with a very unequal
distribution of income and wealth which means they don't have the
same broad-based consumption patterns of developed economies. They
also have relatively low average incomes and therefore can only
carry relatively low private sector debt to GDP ratios. This caps
the level of consumption and the ability to grow private sector
credit, which forms the basis for the developed domestic consumer
economies. This is probably best reflected in the ina bility of
)to tap the huge Brazilian market and build decent margins, with
many consumers simply unable to afford high end (high margin)
For U.S.-based investors looking for Latin America exposure, both
via broad regional ETFs as well as single country ETFs, which would
your top choices be? Any funds you would specifically avoid?
That is another difficult question to answer because I generally
prefer to not invest via ETFs. My bias is to invest directly
through individual stocks and my preference is for high conviction
concentrated portfolios. But in the case of countries such as Peru
and Colombia, an ETF is the only choice for most U.S. investors if
they are to obtain broad-based investment exposure.
My top choices for ETFs at this time would be Colombia ETFs, of
which there are currently two: Global X FTSE Columbia 20 ETF (GXG)
and Market Vectors Colombia ETF (COLX). I prefer COLX over GXG
despite GXG having performed more strongly in 2012, having a much
greater AUM, and also greater average daily trading volume (making
it potentially more liquid).
There are three reasons I prefer COLX:
- Ithas broader-based exposure to the companies listed on the
Colombian stock market, the Bolsa de Valores de Colombia or
- It has a slightly lower expense ratio, 0.75% vs. 0.78% (I
know it's a marginal difference, but every dollar counts when
investing in broad-based managed investment vehicles).
- It caps all holdings at 8.5%, which creates greater
diversification and potential exposure to smaller Colombian
companies, without leaving investors overexposed to Colombia's
two largest companies, Ecopetrol and Bancolombia.
I also like theiShares MSCI Chile Index ETF (ECH) and the
iShares MSCI All Peru Capped Index ETF (EPU).As mentioned earlier I
believe that Chile is highly underrated by investors and will
continue to experience strong economic growth despite its
dependence on commodities exports, partly due to its stable
political and economic environment combined with strong domestic
demand, and coupled with a mature financial services sector.
I believe that Peru will also provide strong gains for investors
but the lack of maturity in Peru's domestic economy combined with
emerging political issues and economic risk is of some concern.
This is exacerbated by its overreliance on commodities to create
economic growth combined with an immature financial services sector
and domestic consumption patterns. EPU performed strongly in 2012
and that performance could fade away somewhat if the issues
discussed continue to gain traction. President Humala's
(mis-)handling of those issues, particularly regarding the
re-emergence of the
Shining Path Communist Party
along with social unrest regarding a number of mining developments
definitely raises legitimate concerns.
A good compromise ETF for investors seeking broad-based exposure
to the Andean region is the Global X Andean 40 ETF (AND). This ETF
gives investors broad-based exposure to major companies in the
three Andean economies of Colombia, Peru and Chile and is a useful
one-stop shop for portfolio diversification, which is handy for
Caiman Valores is long EC, CIB, YPF and may take a long position in
To read other pieces from Seeking Alpha's Positioning for
Asset Allocation And Rebalancing: (Still)